Do Fiscal Rules Matter?

Abstract

Fiscal rules are laws aimed at reducing the incentive to accumulate debt, and many countries adopt them to discipline local governments. Yet, their effectiveness is disputed because of commitment and enforcement problems. We study their impact applying a quasi-experimental design in Italy. In 1999, the central government imposed fiscal rules on municipal governments, and in 2001 relaxed them below 5,000 inhabitants. We exploit the before/after and discontinuous policy variation, and show that relaxing fiscal rules increases deficits and lowers taxes. The effect is larger if the mayor can be reelected, the number of parties is higher, and voters are older. (JEL E62, H71, H72, H74, R51)

Spatial Interaction in Local Expenditures Among Italian Municipalities: Evidence from Italy 2001-2011

“…Finally, the dummy variable domestic stability pact shows a negative coefficient (-38.08) and statistically significant at 1% (col. 6, Table 2). This result confirms the strength of the Domestic Stability Pact in constraining local expenditures, in line with recent findings (Grembi et al, 2016).…”

Women's Liberation as a Financial Innovation

“…We next repeat the above exercises using state border pairs to control for local economic conditions, in the spirit of Holmes (). We take a difference‐in‐discontinuities approach, as in Grembi, Nannicini, and Troiano (). For this exercise, we only use states that gave rights between 1860 and 1870 along with their neighbors, and denote this sample “portfolio borders.” As before, we drop Wyoming from our list of states that gave rights in this period due to its small sample size.…”

Politicians' Coherence and Government Debt

“…Although we do not provide an empirical test for our findings, the work of Grembi et al (2016) can be used to assess our main predictions. Grembi et al (2016) analyze the causal effect of relaxing a balanced budget constraint rule on the fiscal behavior of politicians, in small Italian municipalities.…”

“…Grembi et al (2016) analyze the causal effect of relaxing a balanced budget constraint rule on the fiscal behavior of politicians, in small Italian municipalities. They find that politicians facing a relaxed rule increase local public debt.…”